2016 (5) TMI 1139 - AT - Income Tax

Treatment of grant-in-aid towards salary & PF as taxable - received for the payment of arrears of PF of the employees salary and wages of employees - Held that - AO made the addition of grant in aid for Rs. 48, 22, 698/- in the assessment year 2003-04 but the AO in the assessment year 2004-05 has allowed the relief of grant-in-aid for Rs. 44 Lacs. From the facts of the case we find that grant in aid for Rs. 48, 22, 698/- pertaining to the assessment year 2003-04 was allowed in the immediate subsequent assessment year 2004-05 for Rs. 44 Lacs. The learned AR has produced the copies of the assessment orders for the AYs 2003-04 and 2004- 05 in support of its claim and the same are placed on the record. Similarly we also find that the grant-in-aid received by the assessee in the assessment year 2004-05 was not disallowed by the AO. The ld. DR failed to bring anything on record contrary to the argument of the ld. AR and he left the issue to the discretion of the Bench. In view of above and in the interest of justice we are inclined to treat the grant-in-aid as capital in nature therefore it is not liable to tax. Accordingly we reverse the order of the lower authorities and ground raised by the assessee is allowed. Disallowance of employees contribution under the PF Act - Held that - We find that the AO has made the addition of the amount of the employee contribution as there was a delay in payment to PF authorities. However from the assessment order we find that all the payment of employees contribution were made before the due date of filing of Income Tax Return as specified u/s.139(1) of the Act. Now this issue stands covered in favour of assessee and against the Revenue by the decision of Hon ble jurisdictional High Court in the case of CIT v. M/s Vijay Shree Limited 2011 (9) TMI 30 - CALCUTTA HIGH COURT Disallowance of interest paid for delayed deposit of PF - Held that - Interest paid on the late deposit of PF is compensatory in nature therefore it should not be disallowed on the ground of treating the same as penal in nature therefore it is entitled for deduction while computing the profit under the business head. In this view of the matter we reverse the action of Authorities below and ground raised by assessee in appeal is allowed.

Summary

Issues Involved:
1. Taxability of grant-in-aid towards salary and PF.
2. Disallowance of employees' contribution to PF due to late payment.
3. Disallowance of interest paid on delayed deposit of PF.

Issue-wise Detailed Analysis:

1. Taxability of Grant-in-Aid Towards Salary and PF:
The primary issue revolves around whether the grant-in-aid received by the assessee from the Government of West Bengal for salary and PF payments should be treated as taxable revenue receipts or non-taxable capital receipts. The assessee, a Limited Company wholly owned by the Government of West Bengal and engaged in pisciculture, received grants amounting to Rs. 2,83,41,000 for arrears of PF and salary/wages of employees. The AO treated these grants as revenue receipts based on the Supreme Court's decision in Sahney Steel & Press Works Ltd. v. CIT, which held that government grants for revenue expenses are taxable. The CIT(A) upheld the AO's decision, noting that the grants were operational subsidies and not for capital investment.

However, the ITAT found that the grants were specifically for paying salary and PF to keep the employees in employment and were not part of any general scheme for promoting industries. The ITAT distinguished the facts from the Sahney Steel case and relied on the Delhi High Court's decision in CIT v. Handicrafts and Handlooms Export Corporation of India Ltd., which treated similar grants as capital receipts. The ITAT concluded that the grants were capital in nature and not taxable, reversing the lower authorities' decisions.

2. Disallowance of Employees' Contribution to PF Due to Late Payment:
The second issue concerns the disallowance of Rs. 43,34,151 as employees' contribution to PF, which was not deposited within the due date prescribed under the PF Act. The AO disallowed the amount, and the CIT(A) upheld this disallowance, stating that employees' contributions are governed by Section 36(1)(va) read with Section 2(24)(x) and not by Section 43B, and must be paid within the due date under the PF Act.

The ITAT, however, noted that all payments were made before the due date for filing the income tax return under Section 139(1). Citing the jurisdictional High Court's decision in CIT v. M/s Vijay Shree Limited, which held that delayed payments of employees' contributions to PF are deductible if paid before the due date of filing the return, the ITAT allowed the assessee's appeal on this ground.

3. Disallowance of Interest Paid on Delayed Deposit of PF:
The third issue involves the disallowance of Rs. 5,51,228 paid as interest on delayed PF deposits. The AO disallowed this amount, treating it as penal in nature, and the CIT(A) upheld the disallowance, relying on previous decisions that treated such interest as non-deductible.

The ITAT, however, referred to the Supreme Court's decision in Prakash Cotton Mills v. CIT, which distinguished between compensatory and penal interest. The ITAT found that the interest paid on delayed PF deposits was compensatory and not penal, thus deductible under Section 37(1) of the Income Tax Act. Consequently, the ITAT allowed the assessee's appeal on this ground.

Conclusion:
The ITAT ruled in favor of the assessee on all three issues, treating the grant-in-aid as a non-taxable capital receipt, allowing the deduction for employees' PF contributions paid before the return filing due date, and permitting the deduction of interest on delayed PF deposits as compensatory. The appeal was partly allowed, reversing the lower authorities' decisions on these grounds.